American Tower Corporation ($AMT)

All right. It looks like we're there. Live from the York. It's NAREIT. Welcome, everybody. The tradition continues. We don't have 51 seasons like Saturday Night Live does, but American Tower and Raymond James and myself, we started doing these presentations at NAREIT when American Tower converted in 2012. So we were just doing the math -- we've been doing this basically 6, 14...

14. 15.

Exactly 15 times but actually the dirty little secret was, before you converted into a REIT, we were still coming to NAREIT. Before tower companies converted to REITs, but we couldn't get a room...

Don't tell me...

It's okay. But we would meet in the restaurant and say, REIT investors you need to get to know tower companies because they're coming and they're going to be big. And certainly, that's played out. You guys are some of the largest group of real estate companies that are out there in the NAREIT universe. Today, Steve Vondran is joining us, CFO -- CEO sorry, of American Tower. I'm Rick Prentiss, by the way, sorry about that, head of TMT Research at Raymond James. My definition of TMT, telecom, satellites, media but more importantly, towers and digital infrastructure. So Steve, thanks for coming today.

Thanks for hosting us yet again, Rick.

You bet you. I want to start with -- on the 1Q call, you guys talked about how you're feeling this is the strongest strategic footing and set up, you've seen in a decade. You've been American Tower a long time, just like...

26 years.

So we've seen a lot. We've lived through this birth, boom, bust and now rebirth of the tower industry. What do you mean by the strongest strategic footing? And how do you square that with the stock?

Yes. Thanks, Rick We've been really focused for the past few years on taking risk out of the business. There have been some headwinds in the business in various areas. And so when I think about where we are today, from an operational perspective and with our customer base, we're on the strongest footing because we've taken some measures to pull risk out of the portfolio. Our exposure to emerging markets is reduced. Part of that is because we divested in India. And part of it is we've changed our capital investment philosophy to direct more of our CapEx to our developed markets or it used to -- the majority of it used to go to the emerging markets. So by doing that, we're reducing our exposure in the emerging markets. We've also been through kind of a period of reset and repair in a lot of those markets where some of the weaker players have churned out. And so now the vast majority of our revenue in those markets is with the top 1 or 2 carriers in each market. So we think we're largely through the churn events that have kept growth in those markets back over time and remove some of the uncertainty about the revenue stream. So that part of the portfolio is much stronger. Likewise, in the U.S., while, we don't like having churn from DISH, and we didn't like having churn from Sprint. Those are 2 weaker players in the market that was a little bit more of a question mark. So now if you look at the U.S. revenues and the U.S. growth rates, it's underpinned by the 3 major carriers. So from a quality of earnings perspective, we've made a number of moves to dramatically increase the safety, the reliability of those underlying cash flows. On the balance sheet, we've taken a number of steps on the balance sheet to shore that up as well. So where we sit today is we have the lowest leverage and the highest credit rating among all of our peers and less exposure to interest rate fluctuation than we've had in a long time. So when I look at where we sit today, we have a very strong fundamental base better than we've had in over a decade in terms of not seeing negative shocks happen. And there are so many secular tailwinds that are going to promote growth in our business. And when I think about what's underlying our like kind of long-term growth algorithm that we've laid out, it's really based on mobile data consumption in the U.S. And mobile data consumption in the U.S. grew about 35% year-on-year last year according to CTIA, and it's expected to continue to grow at a pace that requires a doubling of network capacity by the end of the decade. And so that provides a lot of tailwinds to our business to provide more service to our customers to get more bandwidth out to people. We also have things that could accelerate that because those projections are just current usage is downloading videos. And AI is not really factored into that. So to the extent that AI comes on devices in a way it's bandwidth intensive that can accelerate those demand trends and 6G just around the corner. I mean if you think about that, the standards are supposed to come out in 2029. That means deployments are probably going to be in 2030, 2031. That's not that far away. So as we look toward the future, we see continued investment in the networks at a steady rate in the base case. We see a potential for acceleration for some of these other factors in it. And that's going to give us a lot of growth over the long term that will continue to drive this business on a more solid base. So when we think about that, that's the more solid fundamental footing. But I also want to remind people we have CoreSite. We have a data center company that's not just a data center. It's a interconnection-rich network dense environment that gives us another high-growth vehicle. It's growing double digits in the U.S. with phenomenal returns. So again, when I think about where we sit today versus where we've been in the past, it's a lower-risk business, has a lot of opportunities for upside. And that positions us well to create a lot of shareholder value in the future.

So help us square that with the stock performance. Obviously, interest rates are what they are and you can't control that.

Well, we're interest rate sensitive. There's a high inverse correlation on that. That's part of it. But there's been a lot of kind of short-term noise in the system. And I think people have to look past these short-term things, they're not material in the long term. And we -- another way we've kind of derisked the way we think about things is we churned Dish at 100%. So there shouldn't be an overhang from that. It's out of the numbers, it's out of the projections, everything that we're telling you guys would plan to do is ex Dish. Now we're still going to litigate. We're still going to try to click our money from those guys, but that's just upside from everything that we've said that's out there. So I think that there's been some short-term noise that's kind of weighed on the sector. It's that satellites and the other stuff, I'm sure you're going to ask about a couple of days, so I'll just tee them up for you. But I think that, that short-term noise has really created some overhangs. And I hope that we're going to move past that and see past that. When you think about the dislocation between public and private multiples where private capital is valuing towers at a much higher multiple, I think they're looking past the short-term stuff. And they're looking at it and saying, I don't care about this noise in the short term. I see 5G densification. Is AI, IC 6G, and they're looking at that long runway of growth ahead, and that's why their value is higher than the public multiples are. So hopefully, we're turning a corner on some of the short-term stuff.

It feels like we are. I mean, it really feels like the tone this week at NAREIT has been, oh, maybe we are finding the base here or maybe people are getting excited about where things could go. And I guess being a wireless tower company, the signal to noise ratio signal of the noise is the noise has been controlling it, maybe people are getting the signal better now.

I hope so. We're trying to get the message out.

Yes. Let's hit more of those because it definitely was a hot topic came up several times, but it feels like a shift is happening. Let's hit the satellite question.

Okay. My favorite topic, right?

I know.

So first, when it comes to satellites, we have a good perspective on what's going on there. We made an investment in AST Space Mobile in the early days to get a board seat, which we still retain. So when we talk about what's happening in the satellite space, we're coming from a place of some knowledge. There's absolutely nothing we see in that space that poses a risk to our business model or our carrier customers. It is a complementary technology. It will supplement the networks, and there are some real positives for both customers and towers that I'll touch on. When people express concern about towers are being disintermediated by satellite, they're not seeing the physics of it. There's not enough bandwidth produced by the satellite networks to be able to replace towers to even lightly populated areas. The place it's going to be the most effective or where we don't even have towers. And if we do have a tower in the place it's that remote, it's certainly not going to be our top-performing tower. So when we kind of looked at it and said, in all these possible scenarios, what's the risk? It's just de minimis. You won't even notice it if we did have an effect there. That doesn't mean we don't have to build towers in rural Montana and the Grand Canyon. Yes, I don't want to build those anyway. So from a risk perspective, I don't see it at all. From an opportunity perspective, though, I think it could be huge. The first area of opportunity I think the satellites provide is for my customers. They're going to provide ubiquitous coverage in a way that they haven't been able to do it before. And that's going to enable new use cases. PAUSE So if you think about some of the what-ifs that are out there, people have talked about using the 5G networks to control drone telemetry or robotics and things like that. You have to have a ubiquitous signal to do that. They haven't had that in the past. We'll give them that. So I think there are new use cases that can create new revenue streams from our customers that will spur investment, that will be good for us. The other thing that I think is going to happen in the satellite world is it's going to actually highlight the places where towers need to be built or where coverage needs to improve. If you think back to 4G when carriers first built those networks, they had some holes in their networks, so they roamed on each other, and that was getting expensive paying to the farming. So we had -- we used to talk about roaming overbuilds in 4G. That was a driver of business I think with satellites, you're going to see a similar phenomenon. There are places at my house, you cannot get a text message out. There's no signal. And no one's building it today. But once that satellite coverage is enabled, people are going to use it. They'll be roaming being paid to the satellite guys, and I'm -- hopefully, I can convince all 3 carriers to build that neighborhood them...

Must have a site they could use.

I'll make it work somehow. Zoning is going to be tough, that's right. But -- so when I look at it, I just look at this being a complete technology, it's going to help my customers. It could enable some new tower builds. So for me, it's all opportunity. I don't see risk in it at all. And I'm glad to see some of it starting to shift a little bit here this week.

That's definitely been my sense is we came in beginning of this week, there was still the fear factor. And it feels like people are like, wait, this could actually -- instead of being bad satellites, it could be neutral. It might even be positive. So it feels like we've made some education this week.

I hope so. Great. On some of those opportunities, you mentioned drones and robotics and 6G and AI inference, upload, download, I don't think you hit yet, but we'll hit that as well. Some of this stuff was maybe going to be 5G. Let's face it as maybe underwhelmed. We've got fixed wireless, which has been a great use case. But there's been a lot of stuff that didn't come in. Why will 6G be -- what's different? I'm still hopeful the end of 5G is going to see some of this. If you go back to 4G, at about this point in 4G 2016, we hadn't seen the social media take off the way it did later in the cycle. So I think there's still time for -- with 6G, when I read some of the new white papers coming out, Ericsson has got a great website that lists some of the benefits of it. I think it's creating new capabilities. It's not just more bandwidth, but it's new capabilities. PAUSE It's spatial tracking, it's things like that. And so I think there are going to be new use cases, new revenue streams that support that. With 5G -- what it really has done for the carriers is reduce the cost per gigabyte. And so I think we lose sight sometimes of the fact that they need to keep producing more and more data to meet that burgeoning demand that we have. And without 5G, that would have been impossible to do it in an economic way. So I think 5G has been a success from that standpoint, and fixed wireless has given the new revenue streams. So I wouldn't call 5G a bust. I would just call it 5G, maybe not as much as we were hoping as customers get it's early over. But as I look at 6G, it's just a different set of capabilities is what they're hoping to create with that.

One of the topics this week at NAREIT has also been the edge. We talked about it years ago, and it kind of quieted down. It's back. What's exciting and what's different about the edge and what does it mean for American Tower?

I got very excited about Edge at the beginning of 5G because mobile edge compute was something that was enabled by 5G, and I was wrong on the timing. It didn't happen as quickly as I thought it was going to be, but it's going to happen. And I'm more convinced than ever, it's going to happen, and I'm more convinced than ever that we have the right to win in that space. You're now starting to hear other people talk about it. The wireless carriers are talking about it. You're starting to hear some of the chip manufacturers talking about it. Now what is Edge? That's a question a lot of people are trying to answer. And yes, I suspect that everyone's going to have their own definition for a while until we all agree on what it is. But the way we think about Edge is it's where the wireless networks and the compute come together to enable low latency and to take some of the strain off the networks, both the wireless networks and the wireline networks where you're backhauling petabytes of data it's just not efficient to do that. And the reason that we bought Coresight originally is when you deploy something at the edge, it still needs to be connected back to a data center that has Platon ramps and kind of a wider compute capability. And we think that controlling both ends of that gives us the right one in that space. I'm not going to predict timelines again because I was wrong the first time. But it is constructive to her wireless care, chip makers, cloud providers, all trying to figure it out. And so we have been experimenting. We've deployed in Raleigh, North Carolina. We deployed a data center on one of our tower sites as kind of a playground for folks. And we've got some interesting learnings from that. There's a little bit more demand than I thought for some compute there. It may not be the edge use cases yet that are going to promote the wider ecosystem, but people are working on it and people are thinking about it. So I think we're going to see more developments in that, but I think it's undefined at this point exactly what use cases are going to be there, what that facility looks like an when they're going to be.

Yes, makes sense. It feels like AI and inferencing is also going to play into what you need. And let's talk a little bit about downlink versus uplink SP-14 So 1 of the things that we think could be an accelerant in the back half of 5G is the adoption of AI. When you look at all of the mobile data projection -- growth projections that are out there, they all have an as risk on them that says, does that assume significant uptake in -- that's the Ericsson Board. It's kind of some of the other projections that folks make. And -- that's because today when you're using AI on your device, it's typically text, you're chatting with at GPT, maybe you floatophoto, but it's not really been with intensive. And we're not seeing a lot of machine-to-machine today in the AI. Now you're seeing it on the desktop. And I always believe that whatever is on the desktop today migrates to the wireless device tomorrow. And so I think that you will see these -- and when you start seeing more bandwidth intensive use of it may change the architecture of the networks. Some of the early indications that we've heard from some technologists in the field that kind of monitor AI applications has said that they're seeing AI apps use 25% upline versus traditional networks, which are architected to 10% to 15% in plan. And so when you think about what the customers are going to have to do to provide more robust uplink, that's going to be beneficial for towers. Now I think everyone is still trying to figure out what does that look like. It's not just adding more spectrum. There's actually a re-architecture. Some of the customers have talked about that. And they're trying to figure out how are they going to do that and we're there to support them. But when I think about what's going to drive higher bandwidth adoption. What's going to drive more activity on our sites that we're anticipating in the base case, AI is certainly one of those. One of the was headliners, your tenants, your customers are focusing on -- several of them are focusing on convergence, putting mobile and fixed or broadband at least together. Some of them have said they want to cut CapEx to lower levels. How does that impact what you're saying here and the excitement you're feeling about where this industry is headed.

Sure. Well, they've all put kind of broadband and mobility at the center of their strategies. So I don't think anybody is retreating from being a wireless carrier. And when you look at their CapEx spend, that funds a lot of different things. It's not just equipment on towers. It's not, it's fiber, it's investments in the core R&D. There's a number of things we're investing in. So even if they do take a modest reduction in CapEx, that doesn't mean they're not going to invest in their wireless networks and add equipment to towers. The best PAUSE predictor of activity on our sites is mobile data growth because it's the stress on the networks that requires the carriers to upgrade those networks to meet their consumer demand. And so while we do look at CapEx is a little bit of a leading indicator on it, there's not a perfect correlation there because they do have optionality in where they do it. But they're not going to let their networks get bad enough to see subscriber churn and hurt their business for us like a saving a few bucks PAUSE.

And you mentioned spectral efficiency can help this mobile demand, satisfy it, leasing but also spectrum. Let's hit spectrum for a second because I always view that as a really nice indicator of what your business might look like in the future.

Sure. Well, let me just kind of reiterate, we're expecting the networks to need to double their capacity by the end of the decade. If you look at all the projections of baseline mobile data growth, not AI, baseline growth double by the end of the decade. And we believe about half of that demand will be satisfied by new spectrum being deployed and technology upgrades in 5G. Every time there's a software release, you get more spectrally efficient. But the other half is going to have to be solved through densification, adding more sites and more equipment to existing sites. And so when we think about spectrum, more spectrum is good for towers. It always is. Yes, GFT, good for towers. And so we do have some spectrum that's going to come up for auction next year. It will take a little time to clear it and get deployed. Some of that spectrum may get deployed initially with a software upgrade, but radios are not infinite. So even if they initially use a software upgrade for it, there's a limit to how many back hurts kits, you can put their an antenna. There's a limit to how much traffic is going to be there. So it's still a net positive for us because that will promote more traffic, the more traffic that comes through there, the more equipment they need. So spectrum is good. What I'm more excited about in the spectrum bill and kind of the pipeline is the identification of 6 because the U.S. has been a little bit behind the rest of the world in identifying and clearing that spectrum. And if you look at the big beautiful bill, it's direct to them to identify spectrum in that kind of 6, 7, 8 gigahertz range, which is predicted to be the ranges for 6G spectrum. That's going to go on towers at that high of a frequency, it's not going to propagate as well. You're going to need more towers. You're going to need more sites. And so when I think about 6G, it's the opportunity to get more colocations on existing sites and maybe to build again. So spectrum is good. The more we get the better, and there's some that's identified, and I'm anxious for that to get so clear in kind of market.

It's good to see the FCC get the authority. They have auctions again. We've got an auction currently underway a fairly small auction to get that gear going again and get that machine running. Absolutely. We need the spectrum pipeline to keep turning. You touched on data centers, I want it for a second. Som people kind of forget you guys have gotten core. Right now, data centers are trading at a higher multiple than towers. Personally, I believe probably should be -- or should be probably trading higher. Walk us through what you see with the data center business, why you own a data center business PAUSE -- and how do you get full value for that?

Sure. Well, I agree with the tower multiples by the way. It probably comes as no surprise to anybody. Let me first distinguish what CoreSite is when it's not. It's not -- I don't even like calling the data center business. It is an interconnection network-rich hub that lets people communicate to each other. It happens to also be a data center. to get a PAUSE.

I don't know...

Yes, I think a better name for it. If anybody has any suggestion that would be great. But -- the reason I differentiate that is it's a different business. There's a lot of noise around a lot of money flowing into hyperscale, which are kind of powered shelves for single-use facilities. That's not what we do. What we do is we bring PAUSE networks, enterprises and cloud providers together in an ecosystem where they can trade data directly without having to go out over the Internet and backhaul petabytes of data around. And so we're not a low-cost provider. We're a system that brings customers to clouds and clouds to customers essentially. And now also AI inferencing is going in those facilities. And that's important because that gives us a more competitive moat around it, a more resilient business. It's a lot safer business, in my opinion, and some of the other stuff that's out there. But the reason we bought Coresight was for the interconnection environment. Because as we started thinking about the edge and what that looks like, we realized that anybody can drop a shelter somewhere and run a fiber cable to it. But that fiber has got to land back some more where it's connected to this rich ecosystem. And we tried to partner with CoreSite before we bought them. We try to partner with some of the other guys as well. And they wanted all the value to go to them instead of to the infrastructure provider. So we think that by owning both ends of that, that gives us a right to win in that space when it evolves at the edge that we see coming eventually. In the meantime, it's a phenomenally performing asset. PAUSE -- because that interconnection hub is the backbone of how people connect to each other. The AI inferencing is just as dependent on that distribution as the cloud auto rams were. And so we're seeing tremendous amounts of new business in that. We're dedicating more capital to it. We're building it as quickly as we can. It's a great use of capital. We're continuing to underwrite mid-teens or better stabilize returns, and those get better over time. Those actually get up into the 20s on most of our facilities as they age over time. It's a very low-risk business for us. So it's not a huge part of our business. It's about 6% of our attributable AFFO. We hope to grow it bigger than that. But in the meantime, it's a double-digit growth engine and it helps underwrite better growth for us for the long term. Does it feel like the market is not recognizing the value there, too. Lots think the market seems to be not public markets, are not recognizing what the value of the tower portfolio might be? We are certainly trying to get the message out on that, Rick, and we do talk about it. We get asked that question. I don't know what all goes to the valuations. I don't always understand where the stock price trades with the current news on it. But we are certainly trying to get the message out, and we're trying to provide more information on it, talk about a little bit more. And again, I think if we can grow it to a larger percentage of the business, maybe people appreciate a little bit more.

Great. Let's go back to where we started almost was your stock performance, there's a large correlation -- inverse correlation to interest rates. PAUSE What is PAUSE an interest rate environment really mean to your bottom line AFFO, your fundamentals and how you invest. And some other real estate sectors, the interest rates can really swing. When you think about our core business. Our interest rate sensitivity in terms of our AFFO is really just our debt stack. And I'll kind of refer back to the conversation I started with, which is we've taken a lot of that risk out. We've reduced short-term debt. We've been refinancing things that had a lower interest rate on them previously, but we're kind of getting to the tail end of the really cheap debt refinancing. So you're starting to refence don't head or handle on it. So from a cash flow perspective, we've had some headwinds from interest rates. Those are moderating a bit, and those we believe if interest rates stay kind of where they are, will moderate over time. That's the biggest impact on our cash flow on it. When we think about underwriting our investments, it does affect our cost of capital and kind of how we're sourcing opportunities there. But when we're looking at how to invest to create shareholder value over time, we're looking at what we think the right return criteria is on that. And while it may affect our hurdle rates a little bit, PAUSE -- that's not what's preventing us from doing things like M&A today. The reason we're not able to participate in that market is we're not finding the right opportunities that give us the right growth for the long term in the right markets with the right characteristics. So I would say it's not really the interest rates that are keeping us out of that market. It's more just not having the right deals on the table. And fundamentally, the leasing activity is driven by mobile demand, not driven by the economy driven by cyclicality, it's driven by the addictive nature of a wireless device. They're not addictive. They're just useful. Okay. Great. don't limit screen time. There's no reason to do that. PAUSE The -- if you look at the wireless business in general, we've been through numerous business cycles over our careers and it's proved to be resilient. And it's been recession-proof, investment, investment goes with the technology cycle, you're exactly right. We don't worry about interest rates affecting demand. And if you look at the demand from our customers, our current projections that we're putting out for everybody in terms of our growth rates represent a new business rate with the 3 carriers that's roughly in line with the average new business we've had kind of even when we had 6 carriers and 5 cars and 4 carriers. So we see a healthy demand environment for new business, and we don't see that changing based on interest rates or really anything else other than data growth. So when we think about the growth prospects. So let's bring it all back up to the 30,000-foot view level. What should investors think that American Tower can deliver at a revenue and an attributable AFFO per share growth rate and for dividends as you look out over whatever period you're comfortable with. Sure. So what we've done is we've given you guys a long-term growth algorithm and let me just kind of walk through the elements of that quickly. So when we think about what our business is going to deliver, we think we can deliver reliably over time, mid- to high single-digit AFFO per share growth. And the components of that are this. In our developed markets, we expect our organic tenant billings growth rates to be mid-single digits. So that's the U.S. and Europe. In our emerging markets, it should be slightly higher than that. Africa is performing higher today. We've had a little bit of repair in Latin America, but we expect to get through that and get back to that higher growth rate for emerging markets. Of course, I would expect to have double-digit growth rates over time. We're also going to be investing CapEx in new assets. So that will provide some additional growth for us. We're also going to expand margins. I committed on our last earnings call that we're on the tower side, we will expand margins 200 to 300 basis points over the next several years. We may have a little bit of financing headwinds coming up and FX is a little bit of a volatility piece there. But when you add all those things together, that revenue growth should deliver reliably mid- to high single-digit AFFO per share growth. And that equates to dividend growth, I think to.

So on the board decision. So on the dividend side, the guide that we have there is that our policy is to dividend out 100% of our taxable income, roughly over time, that should equal our AFFO per share growth subject to board approval. But that is how you should think about the dividends. It should grow roughly in line with our AFFO per share.

And is AI edge or any of that stuff in that? Or is that 1 of those Asterios?

are strict items. That's upside. Our projections for that kind of mid-single-digit growth is based on kind of the baseline case is business as usual, if there are events that change that for the positive, that could be upside from there.

Great. One, 0. We're done. Thank you, sir.